Learn below the importance of managing your risk when trading CFDs
How to manage risk when trading?
As leveraged instruments CFD’s have the potential to generate significant profit or loss. Leverage increases the rate at which profit and loss can occur making CFD’s high risk product and as such it is your responsibility to monitor your trades and all open positions until they are closed. We recommend that you perform your own research to learn best-practice risk management and strategies for successful CFD and Forex trades. While no trade can be characterised as “risk-free” you can keep your risk exposure in line with your risk appetite by maintaining a risk management plan and constant vigilance. Some risk management strategies are outlined below;
Stop Loss Orders
A stop-loss order came to use when the price moves against your favour. By setting up a specific price, usually, the price level that you’re willing to your risk by, and when the price moves against you till the specific price you set up, the trade will be closed automatically. A stop-loss order keeps you away from bigger losses when you are losing money from an unfavourable price move. Trading highly volatile assets can cause the balance of your account to drop to unsustainable levels. Even with a stop-loss order in place you are not guaranteed your position will close at the exact level specified. If there is slippage and the market suddenly gaps beyond the stop-loss level you set your position may close at a price other than what was requested.
A take-profit orders works similar to a limit order, as in it’s always executed at the target price you specify. When the price is moving in your favour, once the price reaches the price level you have set up, the trade will automatically be closed and pass on any positive slippage. The downside being that you may sometimes close a position on trades with profitable trends that may continue long after you’ve exited. The decision to use a take-profit order is your exclusive responsibility as a trader and will entirely depend on your risk appetite or risk management plan.
The term “slippage” relates to the difference between the expected price of a trade and the price at which the trade is executed. Slippage is a normal phenomenon with Forex markets and may arise under certain conditions such as illiquidity and high volatility after financial news announcements, economic events and market openings. The only way to defend yourself from slippage is to avoid trading when the market is showing signs of extreme volatility.
The New Zealand Financial Markets Authority (FMA) recommends that you always trade with a licensed provider. For a full list of licensed providers you can visit their website. It is important when researching that you consider that off shore providers may not be licensed, nor reputable due to different regulations around the world. Before you place a trade you should consider how they handle market risk, what their obligations are to you if something goes wrong, fees & charges and information about leverage. Always read the product disclosure statement (PDS) as different types of Forex trading products involve different risks. If you are unsure then talk to an authorised financial adviser with expertise in this area. Ask them wether this is a sensible strategy for you and for guidance on the level of loss you can afford. Rockfort is a fully licensed provider and meets all standards required by the FMA.